auto equity loans auto title loans

Auto Equity Loans — Everything You Need to Know

You need cash, and you need it now. The only problem is your credit is in shambles, so getting a personal loan is not a viable option. And a payday loan isn’t enough. After doing a bit of research, you discover auto equity loans. But are they your best bet?

How auto equity loans work

Before we dig any deeper, it’s pertinent that you understand what an auto equity loan is and how it works. In a nutshell, it is a secured loan that operates in the same manner as a home equity loan, except you are tapping into the built-up value you have in your car instead of your home. Good credit is not necessarily required, because you are putting up your vehicle as collateral, and it can be taken by the lender if you default on the loan.

The lender will assess the value of your car to determine the loan amount you qualify for. Your loan term could span from 12 months to several years. It depends on the lender and loan amount.

Benefits of auto equity loans

If you’re considering an auto equity loan, here are some advantages to keep in mind:

1. Auto equity loans are an easy way to get fast cash

Most lenders issue a decision in minutes, whether you visit a branch or apply online. For the latter, it may take a little longer to receive funds if you need to send in supporting documents to verify your identity and income.

2. Car title not required

Unlike auto title loans, auto equity loans are available to those who do not have the title to their vehicle. This is typically the case if you’re still making payments.

3. The loan term can be extended

This may be music to your ears if you know for certain you’re going to need more time to pay off the loan. The downside: extending the loan comes at a hefty cost. More on that shortly.

4. No prepayment penalty

You can cut interest costs by eliminating the balance before the due date. How so? “Almost all lender have zero prepayment penalties, so if you pay [the loan] off sooner, you will save a lot of money on interest,” notes Fred Winchar, owner of TMG Loan Processing.

Drawbacks of auto equity loans

While there an easy way to get fast cash, auto equity loans can be costly in many ways.

1. Auto equity loans can be risky

If you miss a payment, you can find yourself on the losing end of the equation. For starters, you run the risk of losing your car to repossession. You could also damage your credit score if the loan is delinquent for more than 30 days and the lender reports it to the credit bureaus.

2. Auto equity loans are expensive

The APRs of most lenders range from 36% to over 500% APR. There are a few lenders, such as Finova Financial, that offer more competitive loans, but they are rare. Loan amounts are determined by the value of your car, which could be substantially more than you can afford to borrow and make timely payments on.

And it doesn’t help the interest rates are steeper than most of the loan products you’ll find on the market. “Depending on the lender, you could literally pay the same amount as the money you took out in interest alone,” Winchar says.

So, while you’ll find relief in the short term, the long-term effects when repaying the loan could be drastic.

3. Fees, fees, and more fees

Each time you extend a loan, you’ll have to pay a fee. This could very well keep you in a trap for several months, if not years. You should also be mindful of late payment, overdraft and extension fees.

What you’ll need to qualify

To apply for an auto equity loan, you’ll need to provide the following to the lender:

  • A vehicle registered in your name
  • Loan documentation
  • Proof of identity
  • Proof of employment and income
  • Comprehension and collision auto insurance coverage

Does my credit score matter?

Not necessarily. Most lenders only require that you make a certain amount of consecutive payments on time before they can approve you for a loan. And in some instances, they won’t bother checking your credit because they can take and sell your car to recoup the loan proceeds if you default on the loan.

Where to find an auto equity loan

If you’ve exhausted all your options and are still in the market for an auto equity loan, you may have to do a little legwork to find a lender. Simply put, don’t expect to walk into a major brick-and-mortar bank to get a loan. Instead, you are going to have to give community banks, credit unions and online lenders a try.

Don’t know where to start? Check out SuperMoney’s auto title loan comparison engine to explore your options.